Financial Commerce The American College Madurai ABSTRACT The

Financial challenges and avenues
Micro, Small and Medium Enterprises (MSME)



Department of Commerce

The American College




economic growth of any country largely depends upon the entrepreneurial
development of that particular country. It speeds up the process of industrial
growth and thereby stimulates economic progress. The Micro, Small and Medium Enterprises
(MSME) sector in India has been recognized for its potential in facilitating
higher employment, production, exports and encouraging entrepreneurship. MSMEs
in India are identified to contribute 25% of the Gross Domestic Product (GDP)
by the end of the year 2022. Despite these leads, MSMEs face difficulties in
availing timely and adequate credit because of less access to equity capital.
And even if such credit is availed, it incurs high cost to the entrepreneurs. This
paper is an attempt to study such financial difficulties and consequent
institutional assistance available to them for overcoming such difficulties.

Micro, Small and Medium Enterprises, economic growth, entrepreneurial development,
Gross Domestic Product



small and medium enterprises (MSME) sector has emerged as a high vibrant and
dynamic sector of the Indian economy over the last five decades. MSMEs not only
play crucial role in providing large employment opportunities at comparatively
lower capital cost than large industries but also help in industrialization of
rural and backward area thereby reducing regional imbalances, assuring more
equitable distribution of national income and wealth. MSMEs are complementary
to large industries as ancillary units and this sector contributes enormously
to the socio-economic development of the country.

sector consisting of 36 million units, as of today, provides employment to over
80 million persons. The sector through more than 6000 products contributes
about 8% to GDP besides 45% to the total manufacturing output and 40% to the
exports from the country. The MSME sector has the potential to spread
industrial growth across the country and can be a major partner in the process
of inclusive growth.

is the proud legacy of our national freedom movement and the gather of our
nation. Khadi and village industries (KVI) are now national heritages of India.
One of the most significant aspects of KVI is its capita investment. The KVI sector
not only serves the basic needs of processed goods of the vast rural sector of
the country, but also provides sustainable employment to rural artisans. KVI
today represent an exquisite, heritage product, which is ‘ethnic’ as well as
‘ethical’. The sector has a potentially strong clientele among the middle and
upper echelons of the society.

also play significant role in national development through high contribution to
domestic production, significant export earnings, low investment requirements,
operational flexibility, location wise mobility, low intensive imports,
capacities to develop appropriate indigenous technology, import substitution,
technology-oriented industries, competitiveness in domestic and export markets
thereby generating new entrepreneurs by providing knowledge and training.




1)      To
understand the definition of MSMEs as per MSMED Act, 2006.

2)      To
analyse the financial challenges faced by MSMEs.

3)      To
identify the institutional finance, government support functions available to




            Micro, small, medium enterprises as
per MSMED Act, 2006 are defined based on their investment in plant and
machinery for manufacturing enterprises and on equipment for enterprises
providing or rendering services. The present ceilings on investment for enterprises to be classified as micro, small and medium enterprises are
as follows



term village industries has been redefined in amended KVIC Act, 1956 as “any
industry located in a rural area which produces any goods or renders any
service with or without the use of power and in which the fixed capital
investment per head of artisan or worker does not exceed Rs.1 lakh (Rs.1.5
lakhs in case of village industry located in a hilly area) or such other sum as
may, by notification in the Official Gazette, be specified from time to time by
the central government.







Scarcity entails that resources are never adequate to meet
the unlimited needs of any society. The SME sector is one
of those sectors that require significant financing. The sector is peculiar in
that it is now the engine of economic growth after the tremendous structural
transformation that took place in the economy over the last decade.

to the World Bank, formal SMEs contribute up to 45 percent of total employment
and up to 33 percent of national income (GDP) in emerging economies. These
numbers are significantly higher when informal SMEs are included.

to finance has been cited as a major obstacle to SMEs growth in most countries.
The challenges to SME’s access to finance may be caused by certain lender-side
priorities. They are given below.

1.      Higher
transaction costs emerging from processing of many small loans

2.      Perceived
high risk and uncertainty due to informalisation of operations,

3.      Documentation
requirements and perceived cumbersome lending processes

4.      Difficulty
in accurately assessing SMEs cash flows

5.      Liquidity
constraints, sovereign risk and the resultant high interest rates.

6.      Most
SMEs are perceived to have a higher probability of default than larger firms.
This may in turn lead banks to be generally more selective in supplying loans
to them.

7.      The
SMEs are a heterogeneous group with diverse players and different levels of
development and sophistication of enterprises.

8.      Difficulty
in obtaining the information necessary to assess the risks of new and unproven
ventures, which depend on skills of the entrepreneur.

9.      The
probability of failure for new small ventures as a consequence is considered to
be high.

10.  The
lack of detailed data base of SMEs players across the country means that
funders are not sure of how many, where and how these players operate.

11.  The
demand side constraints points mostly to firm characteristics and owner
perceptions which inhibit SMEs access to external finance. These factors

12.  Non
collateraliseable fixed assets,

13.  Reluctance
of SME players to admit new partners to expand capital base,

14.  Lack
of transparency in operations as owners keep these as secrets,

15.  Failure
to maintain proper books of accounts,

16.  Reluctance
to register their business

17.  General
opaqueness of the operations of SMEs since there is no governance framework.

18.  The
regulatory constraints include the following factors;

19.  The
lack of detailed data base of SMEs players across the country means that
funders are not sure of how many, where and how these players operate.

20.  Lack
of regulatory frameworks that can be used by the banks to assess risk such
credit reference system and collateral registry among others

21.  Tight
regulations on KYC information required of which the majority of the SMEs don’t

22.  Lack
of operational credit guarantee scheme in the country. The operationalisation
of PCGs is crucial to SMEs success, and support can be provided to design and
capitalize such facilities.

23.  In-depth
knowledge about the players in the sector would assist in devising funding
strategies and intervention measures that adequately respond to the needs of
the sector. This requires that the potential financiers understand the
following imperatives:

24.  The
nature and dynamics of the sector in terms of product and service offering;

25.  Funding

26.  Risk

27.  Level
of profitability;

28.  Accounting

29.  Varied
compliance levels with local authorities’ by-laws

30.  The
size of various enterprises.




Institutional Finance to MSMEs


Finance is the basic need of every business venture. Every
activity ranging from growth, development and diversification requires finance.
Generally, banks and other financial institutions provide funds only to the
extent of 75% to 80% for the amount applied for. In other words, the sanctioned
amount is always less than the collateral produced by the borrower. This means
that the balance amount has to be financed by them. In case of micro and small
enterprises, initially work is commenced from the personal funds of the
entrepreneur and later loan applications are made to financial institutions.
Therefore, these industries have heavy financial risks and hence they will
succeed only if they conquer the market competition. The various financial
institutions utilised for fixed capital and working capital are given below.


Commercial Banks

    The commercial
banks play a vital role in providing financial assistance to trade and
industries. Presently there are 28 Nationalised Banks, 34 Private Sector Banks,
42 Foreign Banks and 196 Rural Banks. Amongst these, the Nationalised Banks
have the widest coverage throughout the country including rural areas. The
small-scale industries started getting attention only after RBI initiated the
“Lead Bank Scheme”. SSIs usually meet their working capital needs by way of
overdraft facilities offered by the commercial banks.


Industrial Development Bank of India (IDBI)

1964, commercial banks and private banks extended credit to the industries. At
that point of time, the central government recognised the need of developing a
separate centralised development bank and so emerged the IDBI. It got autonomy
status in the year 1976. It works as an apex institution for term finance to
industries and coordinates the functioning of the agencies’ financing,
promoting and developing the industries. Since its inception, IDBI is playing
an important role in promotion of small scale industries through refinance
scheme of industrial loans and by way of discounting bills.


Industrial Finance Corporation of India (IFCI)

was commenced in the year 1948 with the aim of extending medium and long-term
credits to various types of industries in India. It extends financial
assistance to industries in Rupees as well as foreign currency as per their
need. Apart from these, it helps in direct subscription of shares and
debentures and provides financial assistance for purchase of equipments to the
industries. The projects involving value of Rs.300 Crores or more are only
eligible for availing assistance from IFCI.


Industrial Credit and Investment Corporation of India (ICICI)

    It was started in
the year 1955 to provide funds to the developing small and medium scale
industries of private sector. It funds the establishment, expansion and modernisation
of enterprises. It offers deferred credit, leasing credit, instalment, sale and
venture capital. The assistance is given primarily for purchase of capital
assets like land, building and machinery. ICICI sanctions minimum loan of Rs. 5
Lakhs and there is no maximum limit on the upper end. The private sector owns
90% of the shares of ICICI.


Industrial Reconstruction Bank of India (IRBI)

was started with the aim of addressing the problems of sick industrial units.
Many small-scale industries get affected by various problems with the final
impact of financial distress. IRBI assists in the revival of such industries by
acting as a principal agency for credit and reconstruction. Various textile,
engineering, foundry and mining industries have been benefitted by IRBI in
their rehabilitation process.


Life Insurance Corporation of India (LIC)

    It is a
nationalised body started in the year 1956 under LIC Act and is deemed to be
one of the biggest money collectors in India. It was the sole Insurance Scheme
organiser until the liberalisation of 1991. LIC started giving loans for
housing schemes, rural electrification and water supply schemes. It has given
term loans for:-

New Projects – 37%

Expansion and Diversification Projects – 31%

Modernisation and Rehabilitation Projects – 12%



State Financial Corporations (SFCs)

are independent units setup in 1948 in order to provide financial assistance to
medium and large-scaled industries. Later the assistance was extended to
small-scale units also. They provide term loans to various small, medium and
large industries based on collaterals like land, buildings, machineries and
shares, etc. Apart from helping SMEs, they provide opportunity to socially
deprived and backward classes to become successful entrepreneurs. Presently,
there are 19 SFCs in different states of India.




Support Functions
to MSMEs


Mere finance is not enough for the functioning or growth of a
business enterprise. Technical knowledge, skill, expertise, proper guidance and
support are also equally essential for the functioning of a business. An
entrepreneur may not be well acquainted with various government subsidies and
assistance given for setting up of an industry. They may also not be familiar
with the risks associated in starting up of a business. In order to guide them
in this regard, there are several institutions operating under central and
state government(s). They are given below.

1.      Small Industries Development Bank of India (SIDBI) – This is
the only institution involved in providing financial assistance apart from
other guidance and assistance activities.

2.      National Small Industries Corporation Ltd. (NSIC)

3.      Small Industries Development Organisation (SIDO)

4.      Small Scale Industries Board (SSIB)

5.      State Small Industries Development Corporations (SSIDC)

6.      Small Industries Service Institutes (SISI)

7.      District Industries Centres (DIC)
















In the current
scenario, many MSMEs are emerging gradually. Business environment has become
dynamic due to the advent of technological advancement. India has got a great
lead in the IT industry. The overall performance and contribution of MSMEs to
Indian economy is described in terms of its tremendous growth in employment,
production and exports. MSMED Act, 2006 is considered as a crucial step taken
towards the upliftment of small scale industries. Despite facing various
challenges, the MSME sector has shown excellent adaptability and resilience to
recent economic recession. A rewarding feature of economic development in India
is due to impressive growth of modern MSMEs in the days to come.




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4)      Jayshree Suresh, “Entrepreneurial Development”

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“Entrepreneurship”, Tata Mcgraw Hill Education Private

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Prospects and problems of MSMEs sector in India: An analytical study” ,
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in India: Its growth and prospects”, Abhinav Publications (August 2014)

8)      “MSME
at a glance”, Ministry of micro, small and medium enterprises, Govt. of India

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and ISED

10)  Sanderson
Abel, “Constraints to financing SMEs”, The Herald (Jan 2018)

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Dwibedi, “MSME: The Current Scenario”, India fellow blog